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Warren Buffett and Dividend Stocks: Everything Investors Need to Know

Matthew Frankel, CFP, The Motley Fool

Warren Buffett is perhaps the most respected stock investor of all time. As CEO of conglomerate Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Buffett has personally selected most of the stocks in the company's $200 billion+ portfolio.

Of the 48 stocks currently in the portfolio, two-thirds have one big characteristic in common -- they pay dividends. Buffett loves investing in top-quality dividend stocks, and over the years, has amassed an impressive portfolio that generates billions in dividend income for Berkshire's operations.

Here's a rundown of Berkshire Hathaway's dividend stocks, why Buffett loves dividends (and these businesses in particular), and why even though he seems to love receiving dividends, Berkshire Hathaway doesn't pay its shareholders any dividends at all.

Warren Buffett speaking with media.

Image source: The Motley Fool.

What dividend stocks does Warren Buffett own?

Berkshire Hathaway owns more than 40 different common stocks in its $211 billion portfolio, and the majority of them are dividend-paying companies. Since the portfolio is so big, and much of its value is concentrated in its largest holdings, here's a look at the 10 largest dividend-paying stocks (by market value) Berkshire Hathaway owns, according to the latest available SEC filings:

Company (Stock Symbol)

Shares Berkshire Owns

Annual Dividend Per Share

Recent Dividend Yield

Apple (NASDAQ: AAPL)

249,589,329

$2.92

1.4%

Bank of America (NYSE: BAC)

896,167,600

$0.60

2%

Wells Fargo (NYSE: WFC)

426,768,902

$1.80

3.7%

Coca-Cola (NYSE: KO)

400,000,000

$1.60

3.3%

American Express (NYSE: AXP)

151,610,700

$1.56

1.3%

Kraft Heinz (NASDAQ: KHC)

325,634,818

$1.60

4.8%

U.S. Bancorp (NYSE: USB)

129,308,831

$1.48

2.8%

JPMorgan Chase (NYSE: JPM)

50,116,394

$3.20

2.8%

Moody's (NYSE: MCO)

24,669,778

$2.00

1%

Delta Air Lines (NYSE: DAL)

70,910,456

$1.40

2.4%

Data source: CNBC. Holdings as of 12/31/18, annual dividends and yields as of 4/30/19.

In addition to these large positions, here's a look at all of the other dividend stocks Berkshire currently owns:

Company (Stock Symbol)

Shares Berkshire Owns

Annual Dividend Per Share

Current Dividend Yield

Bank of New York Mellon (NYSE: BK)

80,937,250

$1.12

2.3%

Goldman Sachs (NYSE: GS)

18,353,635

$3.40

1.6%

Southwest Airlines (NYSE: LUV)

54,847,399

$0.64

1.2%

General Motors (NYSE: GM)

72,269,696

$1.52

3.8%

Visa (NYSE: V)

10,562,460

$1.00

0.6%

American Airlines (NASDAQ: AAL)

43,700,000

$0.40

1.2%

Mastercard (NYSE: MA)

4,934,756

$1.32

0.5%

Phillips 66 (NYSE: PSX)

11,895,842

$3.20

3.4%

PNC Financial (NYSE: PNC)

8,263,062

$3.80

2.8%

Costco Wholesale (NASDAQ: COST)

4,333,363

$2.60

1.1%

M&T Bank (NYSE: MTB)

5,382,040

$4.00

2.3%

Travelers (NYSE: TRV)

5,958,391

$3.28

2.3%

Synchrony Financial (NYSE: SYF)

20,803,000

$0.84

2.4%

Store Capital (NYSE: STOR)

18,621,674

$1.32

4%

Torchmark (NYSE: TMK)

6,353,727

$0.69

0.8%

Restaurant Brands International (NYSE: QSR)

8,438,225

$2.00

3.1%

Suncor Energy (NYSE: SU)

10,758,000

$1.26

3.8%

Johnson & Johnson (NYSE: JNJ)

327,100

$3.80

2.7%

Procter & Gamble (NYSE: PG)

315,400

$2.98

2.9%

Mondelez (NASDAQ: MDLZ)

578,000

$1.04

2.1%

United Parcel Service (NYSE: UPS)

59,400

$3.84

3.7%

Verizon (NYSE: VZ)

928

$2.41

4.2%

Data source: CNBC. Holdings as of 12/31/18, annual dividends and yields as of 4/30/19.

In fact, there are only a few stocks Berkshire owns that don't pay regular dividends. These include Charter Communications (NASDAQ: CHTR), Verisign (NASDAQ: VRSN), Davita (NYSE: DVA), United Continental (NASDAQ: UAL), and a few other smaller positions. The bottom line -- most of the stocks Buffett and his team purchase are dividend payers.

Why Warren Buffett loves dividend stocks

First of all, it isn't just that Buffett loves dividend stocks. He loves stocks with reliable and sustainable dividends, especially if the company has a track record of increasing the payout year after year.

Just take a look at some of Berkshire's biggest stock investments in the charts (Note: All 10 of Berkshire's largest stock positions pay dividends). Coca-Cola has been a staple of Berkshire's portfolio for decades and has increased its dividend for an astonishing 56 years in a row. Apple is a relatively new dividend payer, but already has a strong history of dividend increases. And, while most banks were required to slash their dividends as a result of the financial crisis, Buffett's bank stocks (much of which were acquired after the crisis) are all earning plenty of cash to allow for future dividend increases.

Jar of coins labeled dividends.

Image source: Getty Images.

The reason Buffett likes reliable dividend stocks is simple – they generate a consistent (and growing) source of cash flow that Berkshire Hathaway can deploy as it sees fit. As we're about to see in the next section, the dividend stocks in Berkshire's stock portfolio provide the company with billions in annual income. Dividend stocks can provide capital for Berkshire's next acquisition, to buy more stocks for the portfolio, or to buy back shares – whatever the best option is at the time.

Why does Warren Buffett love these businesses so much?

As you can see, there are 32 dividend-paying stocks in Berkshire's stock portfolio, and they cover a wide variety of industries. So, we aren't going to go through each company individually to discuss why Buffett likes them.

However, there are some common themes here. For one thing, you'll notice there are a ton of bank stocks in Buffett's portfolio, especially among the largest holdings. In fact, five out of Berkshire's 10 largest dividend-paying stocks are banks. Buffett likes businesses that use low-cost capital to generate profits, and banks definitely qualify. Customers deposit money in banks and receive small amounts of interest -- meanwhile, the bank lends the money out at a higher interest rate. Banking is also a "forever" business, meaning that it will always be around. While technologies will certainly evolve over time, people will always need safe places to keep their money.

Similar characteristics apply to the rest of Berkshire's dividend stocks. They often have business models that aren't too capital-intensive, are in "forever" industries, and/or have a durable competitive advantage. Generally speaking, well-established companies that fall into these categories pay dividends. It isn't necessarily that Buffett chose these stocks because they pay dividends -- rather, it's that the types of businesses Buffett loves to invest in are the kind that also typically choose to pay dividends to shareholders.

How much dividend income is Berkshire Hathaway earning?

In 2018, Berkshire Hathaway collected $3.8 billion in dividends from its stock portfolio, according to Buffett's annual letter to shareholders. And, Buffett says this number will likely increase in 2019.

He's right. I'll spare you the math, but the dividends in the previous section's charts translate into about $4.47 billion in dividend income in 2019, and that's assuming that none of these positions get any bigger and none of these companies raise their dividends during 2019. To put it mildly, both of those things are likely to happen to some extent.

Does Warren Buffett prefer share buybacks over dividends?

There are two main ways companies can choose to return capital to shareholders -- dividends and stock buybacks. Many use some combination of the two, but one method often takes priority. As an example, while Bank of America pays a decent dividend, the company spends far more money buying back stock.

So, would Warren Buffett rather get a hefty dividend from all of his stocks, or would he rather management focus more of the company's capital on buybacks? The short answer is "it depends."

In his most recent letter to Berkshire Hathaway shareholders, Buffett gave a lengthy discussion on repurchases. And, while his discussion focused on Berkshire buying back its own stock, the same principles hold true regardless of what company you're talking about.

Buffett's general thought is that if a company can buy back its own stock at a discount to its intrinsic value, buybacks make sense. "If the market prices a departing partner's interest at, say, 90¢ on the dollar, continuing shareholders reap an increase in per-share intrinsic value with every repurchase by the company," Buffett wrote. In other words, if you could exchange $90 for a $100 bill, wouldn't it be in your best interest to do so as often as possible?

On the other hand, there are reasons companies can choose to buy back stock aside from just to create value for shareholders. For example, buying back stock simply to reduce the share count and boost EPS can be a terrible idea. As Buffett says, "blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or ever-optimistic CEOs."

To be sure, there's no single way to calculate the intrinsic value of a business -- in fact, there are infinite possible methods to use. I'd be willing to bet that if you asked Warren Buffett, Charlie Munger, and the company's two stock-pickers Ted Weschler and Todd Combs to calculate Berkshire's intrinsic value per share, you'd probably get four slightly different numbers. However, buybacks should be clearly justifiable. This is why Buffett and Munger both have to agree that Berkshire is trading for a discount before buybacks can take place.

To sum it up, if a company is trading for a significant discount to the intrinsic value of the business, Buffett is all in favor of management allocating large amounts of capital to buybacks. On the other hand, if a solid value case can't be made, Buffett views buybacks as a poor choice.

Why doesn't Berkshire pay a dividend, and will it ever?

The short answer to whether Berkshire will ever pay a dividend is "probably not." And, many investors wonder why this is, especially considering what a large and steadily profitable company Berkshire Hathaway is. As Buffett wrote in his 2012 letter to shareholders, "It puzzles them [some of Berkshire's shareholders] that we relish the dividends we receive from most of the stocks Berkshire owns, but pay out nothing ourselves."

There are a few reasons Buffett has given in the past regarding Berkshire's lack of a dividend. For one thing, different investors may want different yields, so there's no easy way to decide on a dividend policy. And, dividends are taxable to shareholders who own stocks in non-retirement accounts.

However, the biggest reason Buffett doesn't want Berkshire Hathaway to pay a dividend is that he simply feels that it's not the smartest way to use Berkshire's profits.

The four ways Warren Buffett would rather use Berkshire's capital

In a nutshell, Warren Buffett loves receiving dividends from the stocks he owns, but it's highly unlikely that Berkshire Hathaway will ever pay shareholders a dividend. While Buffett feels that paying a steady dividend is certainly a responsible use of capital by certain businesses, the nature of Berkshire Hathaway's business model means that there is almost always a better option on the table.

Keep in mind that Berkshire Hathaway is a diverse conglomerate with more than 60 subsidiary companies and a $200 billion stock portfolio, as opposed to some of Buffett's favorite dividend stocks. In other words, it's unlikely that Apple, Bank of America, or American Express will acquire a business well outside of its current wheelhouse. You're not likely to see Apple buy a food processing company or Bank of America acquire a pharmaceutical manufacturer. On the other hand, neither case would be out of the realm of possibilities for Berkshire.

Obviously, the top priority with Berkshire's capital is to make sure the financial needs of the company's dozens of subsidiary businesses are met. As Buffett wrote in his 2012 letter, "A company's management should first examine reinvestment possibilities offered by its current business-projects to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors."

With more than 60 subsidiary businesses in a range of industries, Berkshire has lots of ways to effectively deploy capital to grow and enhance its current operations. However, that doesn't consume nearly all of the money Berkshire is taking in.

After its current business needs are met, there are a few ways companies can choose to use excess profits, and Berkshire has five main options:

  • Acquisitions -- Buffett's preferred use of Berkshire's capital is to acquire entire companies. This could mean a big acquisition, or smaller acquisitions that "bolt on" to Berkshire's current businesses. Buffett says that "...our shareholders are far wealthier today than they would be if the funds we used for acquisitions had instead been devoted to share repurchases or dividends," and with Berkshire's track record of returns, it's tough to argue with this claim.
  • Common stocks -- As mentioned, Berkshire has a stock portfolio worth more than $200 billion, and Buffett has referred to his willingness to invest substantial sums of money into companies Berkshire doesn't control as a big competitive advantage.
  • Stock buybacks -- Berkshire recently modified its buyback plan to allow the company to repurchase its own stock at any time when both Buffett and Vice Chairman Charlie Munger agree that it's trading for a significant discount to intrinsic value. As Buffett says, "It's hard to go wrong when you're buying dollar bills for 80¢ or less."
  • Nothing -- If Buffett and his team don't like any of their options, they can choose to let their cash build up to fund future acquisitions and stock purchases. In fact, this is exactly what has happened in recent years – Berkshire had $112 billion in cash at the end of 2018.
  • Dividends -- Of course, there's always the option Berkshire could pay a dividend, although it hasn't paid a regular dividend to shareholders under Buffett's leadership. Buffett has said before that shareholders who want income from their investments can simply choose to sell a certain percentage of their holdings each year in order to effectively achieve the same thing as a dividend would.

This list is roughly in the order of Buffett's preference. So, there are four options that Buffett prefers over paying a dividend. And, while the Oracle of Omaha has indicated that he won't simply let cash build up indefinitely, the expanded buyback program makes a Berkshire Hathaway dividend even less likely than it's been.

Furthermore, dividends are tough to stop once they are started. There are few things that can cause a stock's price to plunge faster than a dividend cut, even when it's clearly in the best interest of the business. Buffett loves having the flexibility to deploy Berkshire's profits in the best possible way, which can vary over time, so he wants to maintain the freedom to use all of the company's profits in the most value-adding way possible. Adding a regular dividend would reduce the amount of deployable capital.

The bottom line on Warren Buffett and dividend stocks

To sum it up, Warren Buffett loves high-quality dividend stocks. They provide a predictable and increasing stream of income, which Berkshire Hathaway can then put to work however it sees fit. And, in many cases, Buffett views dividends as a responsible and shareholder-friendly way for companies to use some of their profits.

However, it's important to remember that Berkshire Hathaway isn't just any business. Because it has more realistic options when it comes to deploying capital than most companies do, Buffett doesn't think that paying a dividend instead of using one of Berkshire's other possible capital options is ever the smartest way to go.

More From The Motley Fool

Matthew Frankel, CFP owns shares of American Express, Apple, Bank of America, Berkshire Hathaway (B shares), and General Motors. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Delta Air Lines, Mastercard, Moody's, Southwest Airlines, and Visa. The Motley Fool is short shares of Procter & Gamble and VeriSign and has the following options: short October 2019 $82 calls on Restaurant Brands International, long January 2020 $150 calls on Apple, and short January 2020 $155 calls on Apple. The Motley Fool recommends Costco Wholesale and Verizon Communications. The Motley Fool has a disclosure policy.